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Putting Low Tax Investments In A Tax Deferred Account
A recent study showed that Americans still don't understand how to choose investments for tax deferred accounts such as a tax-deferred IRA accounts. Many investors are still putting low tax investments in tax-deferred accounts. The problem with this is that your taxes could almost double if you don't put the right investments in the right account.
For instance, a municipal bond that has no taxes on its interest does not need to be in a tax-deferred account. Like-wise, if you place a low tax, or tax managed mutual fund in a tax-deferred account you could be converting it to a high tax account. This is how it works, capital on a low tax account the maximum capital gains tax is 15% if you hold it more than a year.
If you place that mutual fund in a tax-deferred account, because you have to pay taxes on anything you take out of the account, you could pay as much as 35% in taxes, depending on the amount you take out. In the case of the no-tax bond fund, you would also inadvertently convert it to a taxable account, since it would be subject to taxes after taking it out of the tax-deferred account.
A tax-deferred variable annuity is sometimes placed in a qualified tax vehicle also. This is not necessary because a tax-deferred variable annuity by itself is already a tax deferred vehicle. You will get no additional benefit by placing it in an qualified tax plan.
Alternatively, municipal bond funds and tax-managed stock funds should be considered as part of your portfolio of low cost and low risk investments standing alone.
Lois Center-Shabazz is the founder of the personal finance website, Msfinancialsavvy.com and the author of the award-winning book, Let's Get Financial Savvy! View her "Savvy Money Kit" now. Msfinancialsavvy.com
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